Why Macy's Store Closure Move Is Brilliant

By Fool.com

On September 8, national department store chain Macy's announced that it would be closing a whopping 35-40 underperforming stores by early 2016 as the company "... works to optimize its omnichannel approach to customers across America." I was taken aback by this move -- but not for the reason you might think.

I was surprised not because its peers,J.C. Penney and Sears Holdings , too, have been shedding stores (albeit amid poor operating results). Or because the number of American shopping malls in operation continues to decline slowly, all while mall vacancy rates continue to creep up. No, I was shocked by the sheer brilliance of the move, and the position of strength from which it was made. Here's why.

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Everyone wants to be Macy'sAnyone who's been paying attention to the retail sector over the last six years has no doubt noticed that it has been feast or famine. The likes of J.C. Penney and Sears have struggled mightily, while a chosen few, such as Macy's, have generated exceptional returns for their shareholders.

Sears Holding Corp.

Source: S&P Capital IQ.

J.C. Penney Company

Source: S&P Capital IQ.

Macy's

Source: S&P Capital IQ.

Reflect on the above data for a moment. Macy's, which produces GAAP profits and billions in free cash flow for its owners each and every year, is choosing of its own volition to follow its troubled peers Sears and J.C. Penney in closing stores. True, Macy's isn't closing as many stores as Sears Holdings, but the fact itself is interesting. Fortunately for Macy's shareholders, the move is being made for one extremely good reason.

Macy's strategy going forwardAs my fellow Foolish writer Adam Levine-Weinberg noted earlier this year, Macy's strategy for the foreseeable future revolves around a blending of physical stores working in tandem with various e-commerce initiatives -- described by management as its "omnichannel" strategy. According to the company's own financial filings:

This forward-thinking strategy by Macy's management team will one day likely make for a spectacular case study at Harvard Business School, but for now we are left to watch as Macy's teaches its peers a masters-level class on just how a department store can thrive in the 21stcentury.

Not only will Macy's remaining stores function as traditional department stores for the everyday needs of the consumer, but as the front end of a distribution chain that starts with that same consumer's computer or mobile phone.

With this in mind, the company has begun building a number of massive, technologically advanced direct-to-consumer distribution facilities (such as a $170 million, 1.3 million square foot facility opened by Macy's last year just north of Tulsa, Oklahoma) that rival Amazon.com's own warehouses in size and scope.

All of this is being accomplished while Macy's seeks new growth markets. It is seeking a foothold in China, for example, via its recently announced e-commerce-focused joint venture with Hong Kong-basedFung Retailing Limited.

Bottom line: Macy's may be closing stores, but it isn't retreating in absolute square footage devoted to fulfilling the needs of its customers.

Three cheers for Macy's managementMacy's management has consistently generated stratospheric returns on equity (averaging 22.24% over the last five years), free cash flow last year of just under $2 billion, all while its comparable peers have bled red ink all over their SEC filings. Macy's management team, led by CEO Terry Lundgren, is bobbing and weaving in what amounts to a treacherous 21stcentury retail environment. Shoppers today aren't shopping the way they did 50 years ago -- it's just that simple.

All the better, Wall Street doesn't appear to fully appreciate Macy's strategic superiority, awarding the company a forward P/E ratio of just 13 according to S&P Capital IQ estimates. I've added Macy's shares to my Foolish watch list, and I urge other Foolish investors to do the same. The move to close 40 stores by early 2016 is dazzling for the simple fact that it focuses on the future whereas peers appear to be focused on the past.

The article Why Macy's Store Closure Move Is Brilliant originally appeared on Fool.com.

Sean O'Reilly has no position in any stocks mentioned. The Motley Fool owns and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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